Steven Crawshaw of the CML talks about the UK mortgage market
The Council of Mortgage Lenders chairman has urged the Bank of England to lead a global action plan to alleviate turmoil in the financial markets.
He called on BoE governor Mervyn King to coordinate action between international central banks such as the European Central Bank and the US Federal Reserve.
The Council of Mortgage Lenders’ members are banks, building societies and other lenders who together undertake around 98% of all residential mortgage lending in the UK. There are 11.8 million mortgages in the UK, with loans worth over £1.2 trillion.
Read the full speech below…
"Good afternoon, ladies and gentlemen. What a difference a year makes.
"This time last year my predecessor, Jon Pain, then managing director of Cheltenham & Gloucester, took the opportunity at this lunch to celebrate the CML’s 18th birthday and the successful, vibrant, innovative and competitive mortgage market in the UK – the envy of the world.
"Many of those attributes still apply equally today, although it may not feel like it at the moment as we steer our businesses through the storms of the liquidity crisis and credit crunch – global events largely outside our direct control.
"Last year, we were all looking ahead to the potential market impacts of – the rollout of Home Information Packs, a new Prime Minister committed to growth in home ownership, and worsening affordability pressures with interest rates trending up to 5.75% and higher.
"HIPs became something of a side show.
"The Prime Minister has shown himself keen to promote shared equity for key workers this week, but a few thousand subsidised transactions makes the new scheme an inaccessible irrelevance to most first time buyers.
"And this week interest rates were reduced to 5%, and I expect further reductions over the coming months as the credit crunch contagion starts to affect the economy more widely.
"So – and stating the obvious, here - we have a very different market picture than we expected this time last year.
"Jon Pain went on to say with remarkable prescience that ‘the holy grail’ is perhaps to create a deeper and more liquid European funding market from which UK lenders, and their customers, can ultimately benefit.
"Access to European Central Bank funds in recent months has certainly helped some UK based lenders. The challenge is for a similar facility to be more widely available in the UK via the Bank of England - sooner rather than later.
"The bit that I defy anyone to claim that they saw coming this time last year has been the corrosive effect of the contagion from the global credit crunch and the shattering consequences of the bank run in the UK last summer.
"Like you, I’ve been reading the daily outpouring of product re-pricing, product withdrawals, and announcements of redundancies and business closures.
"And I have a sense of shock at how deeply our successful industry has already been hit by these unprecedented funding market conditions.
"But I’m also impressed by lenders’ speed of response and determination to continue to deliver mortgages to as many borrowers as possible - the vast majority who want one - within the constraints on our collective access to funds.
"We also continue to focus closely on managing the difficulties for those existing borrowers who may find themselves stretched in this new world order.
"Let me remind you of the CML’s forecasts from last October to put the current situation in context. Then our view was that, year on year, there would be a slow down of around 15% in terms of net lending, with consumer demand underpinning net lending of around £90bn this year, down from £108 billion in 2007.
"However, in the last few months, we have also highlighted the funding gap between supply and this expected demand, as the mortgage market remains predominantly funded by retail savings since last summer.
"Today, the picture is one of slightly lower demand for mortgages since our forecast. But potential borrowing still significantly exceeds the industry’s collective capacity to supply funds. It is therefore a real possibility, looking forward from today, that net lending in 2008 could reach only half last year’s level unless additional funds become available. But it doesn’t have to be that way. More of that later.
"Sometimes, lenders are criticised for being too conservative and risk averse, unwilling to lend against perfectly good propositions. Other times we stand accused of being reckless, enticing poor credit risks into unsustainable borrowing.
"Some of you will have heard me say at our annual conference in December that I thought the first half of my year in office would be spent defending the industry against accusations of lending to the wrong people and the second half against accusations of not lending to enough people. I was of course completely wrong. It was actually during February that the industry was accused of doing both and simultaneously.
"I think we need to address one key issue today. What interventions by the tripartite authorities, in collaboration with the mortgage industry, could help rather than hinder the market?
"Some of you - I think perhaps a diminishing minority - might still argue that the Bank of England should not intervene in a market adapting to a new operating environment.
"We all know the moral hazard argument. We should not be bailed out or subsidised. If risks have not been properly priced in the past, an adjustment needs to be made.
"All true at an individual firm level, but collectively these arguments fail to take account of the risk of contagion for the economy from substantially lower business levels, particularly impacting on housing transactions and first-time buyers.
"I suggest there are several steps needed on the part of the Bank. It needs to realise that the underlying problem may not be the one it thinks it is. Compared to the actions of the Federal Reserve in the US, our central bank stands accused of having been cautious and slow.
"The bank has diagnosed the overhang of assets as the disease. We see it as a symptom.
"It believes that institutions are hoarding liquidity because they do not trust other banks and so are reluctant to lend to each other. We think that lenders are hoarding liquidity because they’re concerned about whether they will be able to access future funding and are managing pipelines of business very cautiously.
"They’re worried less about the here and now and credit risk in the UK mortgage market, than the uncertainty about whether they’ll be able to get funds when they need to refinance their own maturing debt commitments and new mortgage offers they are seeking to make.
"If our diagnosis is right, then deeper and longer term repo facilities – extending beyond the three-month facility to 12 months or perhaps even 24 months – would definitely begin to help to address lenders’ concerns.
"And kick-starting the market for new issuance of mortgage-backed securities – perhaps by incentivising the kind of stable, domestic investors such as pension funds that would fit this market well – is something that the CML believes the Bank should seriously consider.
"If we await the return of global investors without taking action to reinforce why our market is different to the United States, we must accept that our new business levels will shrink substantially and for a significant period of time.
"As we have said this week, without attracting new funding sources, we will see an ongoing process of attrition in mortgage choice, possibly over a protracted period, with lenders managing down demand by tightening lending criteria, increasing price, or withdrawing more products from the market altogether. This is not lender specific but across the piece - large and small; specialist and mainstream; Plc and mutual.
"So today my message to Mervyn King is this. We urge you, governor, to show leadership in the proactive coordination of central bank responses globally to the current systemic risks. And in the UK, deliver on your recent hints to the Treasury Select Committee that you would be prepared to be more flexible. The main short term palliative is in the hands of the Bank of England, and there is a real and immediate need for broader based action than we have seen to date.
"To the chancellor, this message. We welcome your appointment of Sir James Crosby to lead a group including the CML and lenders to address funding problems, including the mortgage backed securities market. In terms of timescale, recommendations by the time of the Pre-Budget Report would simply not address the urgency of market difficulties now, nor reverse the shrinkage of the market I referred to earlier.
"But I very much hope that the interim report in the Summer will point us in the right direction so we can take early steps to address the market dysfunction.
"As the CML has said many times, it would be good for the Government to continue to remind people that the UK mortgage industry has been and remains a major asset to UK plc and our economy.
"This will certainly be a central message when the CML meets government ministers shortly.
"We welcome contact with the government to discuss the position our existing customers - their voters - find themselves in We remain concerned that we still see two big problems - the inadequate state support scheme for mortgage borrowers and the absence of the regulation of sale and leaseback companies.
"Underpinning those borrowers in serious and short term financial difficulty to help minimise the level of repossessions is a clear spend to save policy.
"Yes, it has a short term cost in the form of higher benefit payments, but it delivers tangible longer term returns from helping people get back on their feet, supporting communities, and avoiding the likely higher costs of re-housing and housing benefit support.
"We look forward to continuing the close dialogue we have had with government ministers and officials.
And no CML speech would be complete without a plea to the Financial Services Authority.
"Please regulate us in a proportionate and focussed way – and we do appreciate that this is difficult in the environment flowing from the supervisory failures of Northern Rock.
"Lenders are engaging with the move towards more principles-based regulation and the treating customers fairly agenda. But, we do on occasion feel frustrated that FSA communications seem more alarming than reassuring in tone, failing in what is today the crucial role of helping market confidence.
"With the FSA hugely concerned with monitoring individual institutions’ liquidity on a regular basis, and driven by meeting its business plan commitments, there seems to be little “flex” in the regulator’s approach.
"For many organisations, but perhaps especially for small firms, this means that the regulatory burden is extremely high – some might say excessively so, relative to the consumer benefits.
"To lenders and intermediaries, my message is even simpler. We must make the very best of what we have.
"And what we have is not insignificant. For example - £2.5trillion of equity in the owner-occupied housing stock, against £1trillion of mortgage debt outstanding.
"The ability on the part of many lenders to raise substantial retail deposits is a real ongoing benefit when other funding sources remain constrained.
"The size and resilience of the full-service banking institutions with diversified businesses is also a source of strength for the mortgage market.
"High quality professionals who can not only sell mortgages but also provide a genuine service to borrowers facing less choice and higher costs, and who may need a more holistic financial planning approach as a result, will really add value in current market conditions.
"So let’s use everything we’ve got to make sure that the market adjustment to the new “normal” environment is as painless as possible.
"Finally, and most importantly, a message to mortgage borrowers – our customers.
We want to continue to provide you with the best mortgage market in Europe.
"We want to give you the excellent choice of good value products you’ve become used to. We want to give you good service and fair treatment both at the point of sale and during your ongoing relationship with us.
"And we don’t want you to be prevented from entering the market on good terms just because you don’t have a huge deposit.
"If you’re already in the market, perhaps with blemished credit, we don’t want to diminish your opportunity to rehabilitate your finances.
"It’s for all these reasons and more that we need the tripartite authorities to help us sustain the successful, vibrant, innovative and competitive mortgage market which we have developed since the recession in the early 1990s.
"We still have much more choice than we ever had before deregulation and the entry of specialist lenders into the market.
"We still have many consumers wanting to become home owners, given the opportunity.
"So let us continue to demonstrate to those who would criticise us that we are working for our customers, our industry, and the economy more generally through thick and thin, in good times and bad.
"On behalf of the CML Executive Committee and the staff, we thank you for your support to the CML, and invite your feedback and market intelligence.
"Despite my cautionary words, I hope you are enjoying your lunch, your conversations with your fellow guests, and your own chance to put the mortgage world to rights. Thank you."
